Monetary intervention into credit markets is much easier to start than to stop. In fact, once started, monetary intervention is nearly impossible to stop. Just ask Fed Chairman, Ben Bernanke.
He’s promised to expand the Fed’s balance sheet by over $1 trillion per year until more people have jobs. Considering the money multiplier effect and the “magic” of fractional reserve banking, at some point, each $1 trillion added to the Fed’s balance sheet could translate into $5 trillion – or more – of money flowing into the economy.
Unless you like paying $10 for a cup of coffee, let’s hope this money never gains real traction in the economy. Given this destructive outcome, why is it that Bernanke’s creating so much prospective money?
Here, in Socratic Method, we’ll answer with a question: What would happen if Bernanke didn’t inflate the money supply?
You see, once the financial system’s become dependent on cheap credit, it cannot be taken away without an economic breakdown occurring. Moreover, ever increasing and more frequent issuances are needed just to sustain the appearance of economic stability. So it goes, on and on, until the whole monetary system breaks down in a giant, and even more destructive, economic implosion.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion,” explained Austrian economist, Ludwig von Mises in Human Action. “The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Bernanke, Obama, Congress, and the 49 percent of American households who receive government assistance, are exploring the later. There will be no voluntary abandonment of further credit expansion. The United States, as with most western countries, is fully committed to the pursuit of total catastrophe.
The Politics of Doing the Right Thing
There may be some good, well meaning, fellows out there who still think that with the right policy moves everything will work out just fine. Nonetheless, they are in for a rude awakening. For with each move the policy wizards make the closer they get to total catastrophe.
Yet, perversely, pursuing total catastrophe is the expedient thing for politicians and central bankers to do. Everyone wants to kick the can…to put off the inevitable for another day. Voluntarily abandoning course, and accepting the crisis sooner, is not something the current stock of leaders has the guts to do. They know that doing so will be the quickest way to lose their jobs.
That’s what happened to Poland’s former central banker, Leszek Balcerowicz. As central bank governor of Poland, from 2001 to 2007, Balcerowicz didn’t give people what they wanted. When the rest of Europe was implementing easy money policies, Balcerowicz kept things tight. When other central bankers in Europe were giving away money for practically free, Balcerowicz restricted the availability of cheap bank credit.
In other words, when other central bankers were encouraging people to behave like morons, he discouraged them from making stupid decisions. Subsequently, Poland avoided the boom and bust that most other countries experienced during the first decade of the new millennium. On top of that, Poland was the only European Union country to avoid recession in 2009 and has grown faster than all other European Union economies since.
But rather than getting a thank you, a standing ovation or a box of cigars from his countrymen, Balcerowicz was shown the door when his term ended in 2007. Still, it didn’t bother Balcerowicz one bit. He cares only about doing the right thing…not winning a political popularity contest…
“We Know Better!”
‘“People tend to personalize reforms,’ said Balcerowicz recently to the Wall Street Journal. ‘I don’t mind. I take responsibility for the reforms I launched.”’ Additionally, he said he ‘“understands politicians when they give in [on reform], but I do not accept it.”’
Balcerowicz learned through experience the consequences of bad economic policies while growing up in state-planned Poland. He even worked briefly at the communist Party’s Institute of Marxism-Leninism before the Soviet Union ended in total catastrophe. Balcerowicz does not support the current policies of the Federal Reserve or European Central Bank.
‘“So they know better,’ says Mr. Balcerowicz, about the latest fads in central banking. ‘Risk premiums [interest rates] are too high—according to them! They are above the judgments of the markets. I remember this from socialism: ‘We know better!’”
According to Balcerowicz, in addition to insane monetary policy, the United States and Europe are pursing backwards fiscal policies. “If you reduce through reform current spending, which is too excessive, you are far more likely to be successful with fiscal consolidation than if you increase taxes, which are already too high. Somehow the impression for many people is that increasing taxes is correct and reducing spending is incorrect. It is ideologically loaded.”
Sound familiar?
Sincerely,
MN Gordon
for Economic Prism
